Tamil Nadu

Service Tax cannot be levied on foreclosure charges for loans, Tribunal rules

The Larger Bench of Customs Excise and Service Tax Appellate Tribunal (CESTAT), Chennai has ruled that service tax cannot be levied on foreclosure charges collected from customers by banks and non-banking financial companies, on premature closing of loans.

It said foreclosure charges cannot fall within the ambit of service under banking and other financial services as defined under the provisions of the Finance Act. The services attracted a 12% tax, as per the provisions.

The verdict came in the case of Chennai-based Repco Home Finance Ltd., which provides housing loans to customers and is registered with the Service Tax Department for payment of service tax on banking and other financial services.

The Internal Audit Group of the Service Tax Commissionerate for the period commencing from October 2004 up to June 2007, noticed that Repco had shown income on charges received from clients for foreclosure of loans under the head ― miscellaneous income, but had not paid service tax to the extent of ₹20,50,399/- leviable on such charges collected by it from the customers for premature termination of loans.

The Joint Commissioner of the Services Tax Department had issued a demand notice in 2009, against which Repco had moved the Commissioner (Appeals) and got a favourable ruling. The Department moved CESTAT.

The contention of the banks and non-banking financial companies is that the foreclosure charges are not towards any consideration for a service provided by them but are collected to compensate the banks for the breach of the contract as the borrower seeks to make the payment before the agreed period of time, the Tribunal noted. The banks, therefore, believe that the foreclosure of the loan by making payment before the agreed time cannot be said to be a service under banking and other financial services since the foreclosure seeks to end the existing service, it noted while rejecting the arguments of the Department that premature closure is a facility available to a borrower at a price in the same manner as a facility for availing a loan for a price.

This decision is an important ruling since it has clearly appreciated the distinction between ‘consideration’ and ‘compensation’ which is well understood under the Contract Act, K. Vaitheeswaran, advocate and tax consultant said. The ruling will apply even under GST since a levy of GST is on supply for consideration. Once the amount received does not have the character of consideration, GST should not apply, he added.

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Printable version | Sep 21, 2020 3:59:39 PM | https://www.thehindu.com/news/national/tamil-nadu/service-tax-cannot-be-levied-on-foreclosure-charges-for-loans-tribunal-rules/article32342322.ece

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